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After fattening-up on larger transformative deals in recent years, large CPG companies are going on a diet in 2019 with smaller, strategic purchases expected to dominate much of the M&A landscape.

It's a sharp pivot for companies that until recently were not afraid to spend billions on deals to offset slowing demand in their core businesses and expedite their presences in high-growth segments. These large purchases saddled their acquirers with huge amounts of debt, and in many cases failed to generate the promised synergies.

“I don’t think there is a lot of transformative M&A happening. Those are few and far between," Brittany Weissman, an analyst at Edward Jones, told Food Dive in an interview. There isn't "the pressure to do (those large deals) that there was three or four years ago, so it’s bolt-on M&A.”

“I don’t think there is a lot of transformative M&A happening, those are fewer and far between." There isn't "the pressure to do (those deals) that there was three or four years ago, so it’s bolt on M&A.”

With companies committed to investing in their core brands and improving their long-term financial health, executives attending the annual Consumer Analyst Group of New York conference in Florida last month said M&A remains part of their recipe for growth. But the focus is increasingly likely to be on smaller deals that give the food and beverage makers scale, entrance into new markets or faster-growing categories to complement their existing portfolios.

Keeping the powder dry

A big reason for the pause on large-scale deals is that many companies are either digesting recent purchases or working to pay down debt they incurred in order to pay for those transactions. Sean Connolly, Conagra Brands' CEO, told Food Dive last October that the manufacturer of Banquet, Healthy Choice, Marie Callender's and Birds Eyewill focus on integrating Pinnacle.

"Being investment grade is very important to our company, so that is going to be our focus for the next few years, and after we do that and we get our leverage back down, then we’ll be in a position to think about further reshaping from there," Connolly said in an interview.

But Conagra provided fresh evidence that even the best-intentioned deals can hit an unexpected roadblock. Conagra said in late December that Pinnacle struggled during the second quarter with performance challenges across some "significant brands" as it lost shelf space to competitors. Connolly told analysts the challenges were "not structural ... in nature" and Conagra was taking steps to fix them.

Food executives at CAGNY said while smaller deals will likely dominate, they wouldn't rule out a bigger transaction at a good price or if it was the right fit for their companies.

Don Mulligan, CFO at General Mills, told the audience the cereal and yogurt maker is "continuously evaluating strategic activity and will deploy capital when we see a clear path to value creation for shareholders." He pointed to recent acquisitions of Annie's organic snacks, EPIC all natural bars and Blue Buffalo as some deals that gave the Minnesota company a bigger presence into trendy, rapidly growing categories.

Hunting for the right deal

Hershey CEO Michele Buck told Food Dive that the Amplify and Pirate Brands acquisitions — which were preceded by Krave jerky in 2015 and barkTHINS a year later — are just the beginning.

"Our largest focus for M&A is snacking and really on filling out the places that we don’t currently meet demand,” like better for you and or savory, she said.

During her presentation to analysts at CAGNY, Buck said the 125-year old chocolate maker has strong cash flow and a healthy balance sheet that gives it opportunities to invest in its business through stock buybacks, a dividend, debt repayments and M&A. Hershey, she said, is aiming to lower its debt ratio but would increase it "for the right strategic acquisition."

While the executive comments came before the bombshell news from Kraft Heinz two weeks ago, the company's dividend cut, weak guidance outlook and the write-down in the value of its Kraft and Oscar Mayer brands by $15.4 billion may have cast a further pall on similar deals, according to analysts. While Kraft Heinz cut thousands of jobs, closed plants and wrung out other inefficiencies after the two companies merged in 2015 — giving it the highest profit margins in the U.S. food industry — it did so at the expense of growing its brands as consumers shifted toward healthier, fresher and more natural offerings.

"Never say never with any of the potential partnerships or tie ups. But our expectation is that more of the deals will fail to move the needle as it relates to the financial performance but will likely have more underlining important strategic implications.”

Erin Lash

Director of consumer equity research, Morningstar

Randy Burt, a partner in A.T. Kearney's consumer and retail practice, said the shift toward growth will impact big-scale mergers as companies think less about the cost synergies and more about the growth story that could emerge by bringing the two businesses together rather than keeping them apart. The growth, he said, also extends to smaller bolt-on purchases in which the acquisition provides insight to help reinvigorate brands already in the buyer's portfolio and develop new brands that can be quickly scaled.

"I think the question is going to be how do you get innovation via acquisition, because a lot of the costs have already been taken" out before the deal, Burt said. "It's a much more balanced agenda that needs to be pursued. The stocks that have improved margins but haven't grown, haven't been rewarded from a valuation standpoint, and so I think that's what people are going to look for as they evaluate deals going forward."

Erin Lash, a director of consumer equity research at Morningstar, said if interest rates go up — which would make it more expensive for companies to take on debt to finance a deal — it would be a deterrent for acquisitions in the future. In addition, potential targets asking too high a price from growth-hungry companies could slow the pace of deals too, she said.

"Never say never with any of the potential partnerships or tie ups," Lash told Food Dive. "But our expectation is that more of the deals will fail to move the needle as it relates to the financial performance, but will likely have more underlining important strategic implications.”